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Estimating the FEER for the Czech Economy

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  • Katerina Smidkova

    (Czech National Bank)

Abstract

When currency turbulences hit the Czech crown in May 1997, the research presented in this paper had been nearly finished. It tried to contribute to the discussion of sustainability of external development of the Czech economy by comparing signals given by a set of indicators to signals implied by the estimates of fundamental equilibrium exchange rate for the Czech crown. Interestingly, the method of indicators did not give an unambiguous answer. Specifically, when applied on the Czech data, debt as well as solvency indicators did not imply a danger of external crisis. Financial indicators with a shorter-time horizon did send some warning signals. Indicators of competitiveness watched by large international investors considered the Czech crown to be overvalued since 1995. In order to gain more decisive conclusion on the danger of external crisis, the structural approach was employed. The model simulations of the FEER indicated that the Czech crown became overvalued in 1996 with respect to the central parity of the exchange-rate band. This conclusion was quite robust taking into account behavior of both the real economy as well as decisive external financial flows. The Czech experience with currency turbulences provided an unintentional measure on how good the warning indicators were. The FEER methodology was able to conclude that there was a need for a policy shift in the end of 1996 although it did not give the clear warning that the exchange-rate regime itself was not sustainable.

Suggested Citation

  • Katerina Smidkova, 2003. "Estimating the FEER for the Czech Economy," Macroeconomics 0303014, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0303014
    Note: Type of Document - ; pages: 31 . WP IECNB No 87
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0303/0303014.pdf
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    References listed on IDEAS

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    Cited by:

    1. Julius Horvath, 1999. "The May 1997 Currency Crisis in the Czech Republic," Post-Communist Economies, Taylor & Francis Journals, vol. 11(3), pages 277-298.
    2. Jovanovic, Branimir, 2007. "Calculating the Fundamental Equilibrium Exchange Rate of the Macedonian Denar," MPRA Paper 43161, University Library of Munich, Germany.
    3. Lubos Komarek & Zdenek Cech, Roman Horvath, 2003. "ERM II Membership - the View of the Accession Countries," Working Papers 2003/11, Czech National Bank.
    4. repec:kap:iaecre:v:13:y:2007:i:2:p:183-199 is not listed on IDEAS
    5. Horvath, Julius & Jonas, Jiri, 1998. "Exchange rate regimes in the transition economies: Case study of the Czech Republic: 1990-1997," ZEI Working Papers B 11-1998, University of Bonn, ZEI - Center for European Integration Studies.

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    Keywords

    fundamental real exchange rate czech;

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    • E - Macroeconomics and Monetary Economics

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